HARP 3.0 : Four Important Changes HARP 3 May Include For U.S. Homeowners

At the start of December, Congress will likely confirm Mel Watt as the new Director of the Federal Housing Finance Agency (FHFA). Watt would replace current FHFA Director Ed Demarco.

As head of the FHFA, Watt would helm Fannie Mae and Freddie Mac and would be in custody of the popular Home Affordable Refinance Program (HARP). HARP helps underwater homeowners refinance to current mortgage rates that would otherwise be unattainable.

Under Watt, the program sometimes known as “The Obama Refi” is expected to receive a facelift in order to help qualify more U.S. households for the program.

HARP 3 may be on its way.

HARP : A Brief Summary Of The Program

At the time, mortgage rates were falling to new lows, but at the same time, home values were in retreat. Falling home values pushed huge numbers of U.S. homeowners over the benchmark 80% loan-to-value threshold which meant that to refinance their mortgage was impossible without either (1) reducing the loan balance back to 80 percent of the home’s appraised value, or (2) paying private mortgage insurance (PMI).

Neither option was attractive in the tight, late-decade economy. To spur refinance activity, therefore, and to help jumpstart consumer spending, Congress created HARP.

HARP is a refinance program for homeowners who have lost home equity since the date of home purchase; its main trait is that the program waives PMI requirements for homeowners who once had 20% home equity, but now had less.

Via HARP, homeowners can refinance to current mortgage rates without having to pay mortgage insurance.

HARP Eligibility Requirements

You must have made your last 6 mortgage payments on-time, with no lates

These standards cast a wide net over the U.S. populace and, between 2009-2011, homeowners closed on one million loans HARP loans. The government deemed this good progress, but not great progress. So, in late-2011, the HARP program was revamped and expanded to help reach additional U.S. households.

The main features of HARP 2.0 program are that it waives home appraisal requirements, ignores loan-to-value restrictions, and gives homeowners the right to refinance with any mortgage lender nationwide.

Under HARP 2.0, more Obama Refi loans closed in 2012 than during the program’s first three years combined. This year, more than 1.2 million HARP loans are expected to close.

However, even as HARP 2 remains popular with U.S. homeowners, Congress has been discussing ways to make HARP even more inclusive; ways to expand the program’s reach to households who currently fall outside of the program’s basic eligibility standards.

Momentum behind so-called “HARP 3.0” is now gaining steam. If the program comes to pass as part of Mel Watt’s confirmation to the FHFA, here are four changes HARP 3 may include.

HARP Change 1 : Refinance Alt-A, Subprime Loans Via HARP

In today’s mortgage market, Fannie Mae, Freddie Mac, and the FHA control more than 90% of all new mortgage origination. However, this wasn’t always the case.

Last decade, non-government mortgage lenders commanded a large share of the mortgage market and Alt-A mortgages were among the most common loans they made.

Alt-A mortgages were typically referred to in acronym or shorthand :

SISA loans (Stated Income, Stated Assets)

SIVA loans (Stated Income, Verified Assets)

Lo-Doc loans (Low Documentation Loans)

No-Doc loans (No Documentation Loans)

Despite high profile default rates, there are still large numbers of “performing” Alt-A loans with Alt-A homeowners who are underwater and unable to refinance via HARP like their conforming homeowner peers.

The same is true for sub-prime borrowers who are similarly locked up.

The case for opening HARP 3 to Alt-A and subprime borrowers becomes especially clear when we consider that the 30-year fixed rate mortgage was cheaper from non-government lenders in 2005 than via Fannie Mae or Freddie Mac.

Large numbers of “prime” homeowners used sub-prime loans in 2005 because the mortgage rates were cheaper.

Today, those homeowners are blocked from refinancing. Via HARP 3, that may change.

HARP Change 2 : Allow The “Re-HARP”

Since HARP was first announced in 2009, the average 30-year fixed rate mortgage rate has dropped close to two percentage points. The drop in rates has been a slow one, however.

Rates were in the 5s in 2009 and 2010; fell to the 4s in 2011; and lived in 3s for parts of 2012 and 2013.

Meanwhile, HARP guidelines state that the program may only be used once per household. Therefore, underwater homeowners who used HARP to refinance in 2009 are “stuck” with their HARP mortgage rates from 2009.

Similarly, homeowners using HARP in 2010 are stuck with their HARP mortgage rate from 2010; and homeowners from 2011, and so on.

This one-use restriction takes on added significance since the Federal Reserve launched its third round of qualitative easing (QE3) in September 2012, a program through which the nation’s central banker aims to lower U.S. mortgage rates as far as possible.

Today’s mortgage rates are near 4.25%. Homeowners who HARP-refinanced in 2009 to 5.50% are unable to “re-HARP” to something better .

Should HARP 3 pass, it could implement a feature of the popular FHA Streamline Refinance program — it could give homeowners program-eligibility after 6 payments have been made to the bank. Until then, HARP is one-use only.

HARP Change 3 : Change Cut-Off Date From May 31, 2009

Another HARP 3 change that could put the Home Affordable Refinance Program within reach of more people would be a change in the program’s cut-off date.

Currently, HARP’s eligibility standards require all HARP-refinanced mortgages have a note date of, or prior to, May 31, 2009. This is because — according to a Fannie Mae representative — homeowners whose mortgages come from after this date knew what kind of housing market into which they were buying.

The inference is that HARP was conceived to help homeowners who didn’t know any better.

Even so, among the homeowners who did know better, and still bought a home post May 31, 2009, the spirit of the HARP program should still apply. Many of these homeowners made 20% downpayments and those downpayments have since been lost to the housing downturn.

To help make HARP more uniform nationwide, HARP 3 could be extended to include homeowners refinancing a primary residence for which the mortgage was the note date is post-May 31, 2009. There are many homeowners with mortgages from 2010 who may benefit from a HARP 3 refinance.

HARP Change 4 : Allow HARP Loan Sizes Up To $729,750

The fourth change that should be included in the HARP 3 refinance program is an allowance for “high-balance” loans in designed high-cost area.

First, some background.

Each year, the government releases its mortgage loan limits for Fannie Mae- and Freddie Mac-conforming loans. These figures that represent the maximum-sized loan that the government groups will agree to securitize. Loans which are in excess of these maximum loan limits are called “jumbo” loans.

Since 2006, the conforming loan limit for 1-unit homes has been $417,000. However, in 2009, as part of an economic stimulus plan, areas in which homes were deemed “expensive” were assigned a temporary conforming loan limit increase to $729,750 which was to last until September 30, 2011.

For two-plus years, therefore, home buyers in areas including Orange County, California; New York, New York; and Loudoun County, Virginia could finance up to $729,750 and still be within the maximum loan size limits for Fannie Mae and Freddie Mac.

Then, in October 2011, the loan limits dropped.

Homeowners in high-cost areas could no longer finance up to $729,750 with a conforming mortgage — the limit was dropped to $625,500 — leaving everyone in no-mans land whose conforming mortgage was started between 2009-2011 and for which the remaining balance exceeds $625,500.

So, to remedy this issue, again, HARP 3 can take a page from the FHA Streamline Refinance playbook. So long as the original loan size was within conforming loan limits at the date of original closing, and so long as the refinance doesn’t include “cash out”, the loan size could be approved as-is.

Get Ready To Move Quickly On HARP 3

The White House is pushing for changes using the #MyRefi brand name and the program has been included in the President’s Better Bargain for U.S. Homeowners program.

When HARP 3 passes, it will help millions of additional U.S. households get access to today’s low mortgage rates. HARP 2 made grand improvements over the original Home Affordable Refinance program. HARP 3 will likely do the same.

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